The world is steadily but surely moving towards an era of trade
wars and protectionism. With the controversial bill to punish
China over its currency having been approved by the Senate, the
Sino-US tensions have moved up by a few notches.

When there is disillusionment among the masses and the protestors
are on the streets it’s rather easy to put the blame for one’s
precarious state of affairs on a distant foreign land and it’s
government.

The reality is that it’s not the Chinese policies but the
policies of the US itself that has been responsible the nations
huge indebtedness, joblessness and high Current Account Deficits.

Ever since 1980s the US financial sector has been in trouble for
some reason or the other, be it the tequila crisis, LTCM, Asian
crisis, the subprime crisis and now ofcourse the sovereign debt
crisis and everytime the response of the US government (infact
most Western governments for that matter) has been pretty
predictable; transferring of the bank’s bad debts onto its own
balance sheet thereby increasing the sovereign debt load and the
Central Bank happily monetizing a part of it.

The problem with money printing and issuing sovereign guarantees
is that it never increases the wealth of the society; money is a
store of value for an individual but for the society as a whole
it is just a medium to transfer wealth from one person
to the other or more broadly from one sector of the economy to
another. As a result of the government’s and Central Bank’s
firefighting exercises over the last three decades,
everytime the financial sector was saved capital was transferred
from the manufacturing and other productive sectors of the US
economy and given to the financial sector.

As one can see from the graphs above; that thanks to the
government bailouts and Fed money printing the bloated financial
sector sucked resources from every other sector of the economy
specially the manufacturing sector. Even here a large part of
what is actually accounted for as the contribution of financial
sector to the US GDP is the non-productive activity of flipping
around assets and derivatives and generating a fee income. One
can only fathom of the numbers considering the 700 trillion
dollars market with a daily turnover of as much as 40 trillion
(globally). As also seen from the graph, for all the GDP
contribution that the financial sector makes to the US economy
its contribution to job creation has been paltry to say the
least.

Had all these dollars that were generated to save the defunct
financial sector bottled up inside the US, the CPI levels would
have exploded; instead it was because the Oriental land came to
its rescue by happily servicing the US citizens with cheaper
goods due to its lower labour cost and cheaper currency that the
US was able to maintain its mojo.

The symbiotic relationship wherein the Chinese sold their goods
and services for US dollar and then recycled them back to US by
buying up the treasury bonds is what gave the US government the
ability to run its various social welfare programs and ofcourse
save the banks every now and then.

As can be seen from the graph, post 2007 with the bailouts having
become bigger, the fiscal deficits have outgrown the Current
Account Deficits forcing the Fed to intervene with its massive QE
programs.

It’s not the weaker Chinese Yuan that is the reason for US woes,
the trouble lies with the government and the Fed “Put” on the US
financial sector that has led to serious mis-allocation of
capital. Infact the only reason why the bloated financial sector
which has taken away the productive jobs but has still not
managed to completely take away the purchasing power from the US
citizens thereby draining the vitality of the average US
household is because of the cheaper Chinese goods for which the
cheaper Yuan has a big role to play.

What’s required is not a bill against the Chinese currency
manipulation rather against the Fed and government’s policy
towards what they term as “Too Big To Fail”.